Free Trade at Last?

Time to stop holding Taiwan at arm's length.

Greg Mastel

June 2, 2003, Vol. 8, No. 37

MAINTAINING RELATIONS with both Taiwan and the People's Republic of China has posed a series of challenges to American diplomacy. And things have only become more difficult as Taiwan has completed a transition from authoritarian rule to true democracy, while mainland China remains a dictatorship with a grievous human rights record. Thus it is no longer appropriate that the job of striking a balance between Taiwan and the People's Republic of China be left to professional diplomats and other conciliatory China hands. Their approach is now out of touch with core American values as the United States continues to find its relationship with Taiwan, a model new democracy, constrained by the world's leading authoritarian power, China.

The last three administrations have worked--with varying degrees of enthusiasm--to define a new relationship with Taiwan that recognizes and rewards the progress Taiwan has made. This has included the sale of defensive armaments, demonstrations of U.S. military support, and clearing of the way for Taiwan's membership in the World Trade Organization (WTO). Recent trends and events suggest it is time to take the next step and introduce a free trade agreement (FTA) with Taiwan.

As illustrated by the recent SARS crisis, it is critical that Taiwan's involvement in the international community increase. The spread of SARS from China to Taiwan and the World Health Organization's reluctance to help Taiwan fight the infection demonstrates that the world would be better protected if Taiwan were a member of the WHO. At the very least, Taiwan's efforts to control the disease have offered a stark contrast with Beijing's efforts to cover it up. Despite all this Beijing's bullying has again barred Taiwan from entering the WHO.

But while WHO membership depends on the international community's standing up to Beijing, Washington can move ahead on its own to establish a U.S.-Taiwan Free Trade Agreement.

The economic progress made by Taiwan during its transition to democracy is simply amazing. By building a market-driven, export-oriented economy, Taiwan has lifted its per capita GDP from well under $1,000 per year to about $13,000. Taiwan is now one of the ten largest trading powers in the world and a significant presence in many industrial and high tech sectors. It is also America's 8th-largest trading partner, purchasing more from the United States in most recent years than its mainland neighbor. Many U.S. companies--AT&T, Citibank, DuPont, and Microsoft--have major presences in Taiwan. For their part, Taiwanese companies have invested $600 million in the United States.

Taiwan and the United States have had occasional disputes over the size of the bilateral trade imbalance, agriculture, and, more recently, intellectual property protections. Nevertheless, this large and expanding economic relationship has been beneficial to the United States and instrumental in Taiwan's transition to democracy. While the U.S. security guarantee to Taiwan has certainly been critical, the presence of a strong trade tie with the United States has been at least as important to the building of modern Taiwan.

Currently, the United States has FTAs with Israel, Canada, Mexico, and Jordan. Congress last year gave the green light for more FTAs. New agreements have been negotiated with Singapore and Chile and will likely be approved by Congress later in the year. The United States is also negotiating FTAs with Morocco, South Africa, Australia, and five Central American countries. President Bush has announced that he hopes to negotiate a broad FTA with many Middle Eastern countries over the next decade. Perhaps another dozen countries are seeking agreements with the United States.

FTAs provide an attractive avenue for pursuing economic growth, while encouraging reform in strategically important regions and strengthening relationships with key allies. Especially in a time of tight budgets, the Bush administration's fondness for FTAs is understandable and, indeed, laudable. Unfortunately, the Bush administration has to date overlooked Taiwan on the list of potential FTA partners.

This oversight is hard to understand since Taiwan already has a successful trading relationship with the United States. In fact, Taiwan seems a more promising market for the United States than any of the countries with whom FTA negotiations are currently underway. In a study of the likely effects of an FTA between the United States and Taiwan, the U.S. International Trade Commission--the government's trade think tank--concluded that both the United States and Taiwan would benefit. American farmers, motor vehicle manufacturers, and equipment manufacturers stand to make particular gains in a more open Taiwan market.

Considered from the perspective of business strategy, an FTA would allow U.S. companies to better compete in Taiwan with their rivals in Japan and Europe. Taiwan could even develop into a gateway through which U.S. companies might better access other Asian markets. Furthermore, an economically stable, democratic country in Asia that is a strong ally of the United States has obvious value as a role model for other would-be democracies, including, at some point, China. Conversely, economic instability in Taiwan could destabilize the region and increase the likelihood of a U.S.-China-Taiwan conflict.

Some have argued the United States should hold back on an FTA with Taiwan because of outstanding trade issues, particularly intellectual property protections, which no one disputes is a serious issue. In fact, Taiwan is currently working to improve intellectual property protections for its own sake as well as to answer U.S. concerns. Considered from a tactical perspective, however, such problems argue for pursuing an FTA, not holding back. In the case of Mexico, the negotiations that led to an FTA provided a tremendous opportunity to address thorny issues relating to intellectual property and agriculture. Indeed, more progress would be made on behalf of intellectual property rights and, for example, export opportunities through FTA negotiations than by any other approach.

Of course, the real reason FTA talks with Taiwan are not already underway is fear of upsetting China. Indeed, Beijing would likely object to any FTA talks between the United States and Taiwan, but without justification. Taiwan is already a member of the WTO and the United States has negotiated many trade agreements with Taiwan over the years. Even now, Taiwan is negotiating FTAs with other countries, such as Panama. In short, a U.S.-Taiwan FTA raises no issues not addressed in other contexts.

There is no question China is an important member of the world community. Beijing sits on the U.N. Security Council and could, for instance, play a constructive role in containing North Korea. But this is no reason for the United States to slight a reliable friend and ally. Instead, we should continue pursuing a realistic and responsible framework for policy toward Taiwan that advances our mutual interests. The next step is building an economic bridge between Washington and Taipei in the form of a new free trade agreement, which will allow both countries to build their economies, encourage further reform in Taiwan, and cement a core relationship between free market democracies.

Greg Mastel is a fellow at the New America Foundation and the chief international trade adviser at Miller and Chevalier, Chartered (which provides international trade advice to the government of Taiwan).